More and more manufacturers and retailers are striving to integrate and manage their supply chains on a global scale. Firms such as Bristol-Myers Squibb, Procter & Gamble, RJR, Gillette, and Johnson & Johnson have been at the forefront in capturing significant benefits from globalization in the form of enhanced customer service, reduced operating costs, and higher profitability. Indeed, globalization is far from a new concept to most of these firms. Other companies are just beginning to wrestle with the complex issues of transitioning from autonomous, independent country market-based operating styles to a more intense coordination and management of supply chains globally.

At the same time, initiatives to improve supply chain performance are multiplying. Firms—entire industries, in fact—are launching programs to "integrate supply chains," "align supply with demand," "rationalize facilities and processes," "achieve flexibility," "reduce costs," or "improve inventory performance." The fact is that few firms have implemented a scorecard comprising a balanced set of consistent, customer-focused, supply chain-spanning performance measures. Yet senior management requires these kinds of measures to determine whether supply chain initiatives are achieving tangible improvements on a global scale.

As the trend toward global supply chains accelerates—requiring more materials, components, and finished goods to travel greater distances from fewer, more remote locations—the importance of standardizing and harmonizing performance measures around the world becomes ever more important.

Creation of an effective supply chain management performance system is a critical first step in laying a foundation for successful global supply chain transformation. Without such a scorecard, these efforts often become hopelessly vague and ambiguous—and ultimately fail. As Claudio Ruben, vice-president of the International group of the Gillette Co., states: "We have implemented a global supply chain performance-measurement system in our international markets, and we are already beginning to see improvement in performance. This performance-measurement process has enabled our management teams around the world to focus on the key issues we must address to achieve our world-class supply chain performance goals."

Most all of us have heard the advice that "you get what you pay for." When it comes to supply chain performance, you get what you measure.

Performance measures often are viewed merely as a report card on how a company is doing in supply chain management. Indeed, that is one of the key uses of these measures. But truly effective performance-measurement systems go beyond that. In addition to reporting on performance, they also provide essential diagnostic information to the management teams responsible for improving performance. Furthermore, effective measurement systems allow management to track and monitor progress of their improvement efforts.

This diagnostic information is critical for focusing senior management time on the most important business issues affecting performance. In addition to being a reporting and diagnostic tool, the most successful performance-measurement systems are linked to a firm's compensation and incentive and reward programs. Once this link is established, performance improvement becomes surprisingly rapid and self sustaining.

The set of measures selected should be balanced in reporting and tracking the multiple objectives of the business—such as customer service, operating cost, working capital, and profitability, to name a few. Importantly, the measures should be linked to the overall corporate strategies of the business.

Another feature of an effective measurement system is the ability to view performance consistently across many different dimensions of the enterprise. One diversified consumer-products manufacturer we have worked with now consistently views supply chain performance in many different ways: by line of business (toiletries, paper products, and so forth); by geographic market (Thailand, Argentina, Japan, etc.); globally or by region (Asia/Pacific, South America); across lines of business at the geographic market level, regional level, or globally; or by line of reporting responsibility within the company. These various views of performance ensure that all senior managers enjoy a perspective on performance that allows them to act and influence. And this, in turn, allows them to play a role in achieving the company's global supply chain performance objectives.

There are many different approaches an enterprise might take to develop and implement an effective performance-measure system. Yet we have found the approach illustrated in Exhibit 1 and described here to be effective in building cross-organizational support. Furthermore, this approach taps into the experience and expertise available in every corner of the organization.

A key feature of this approach is the continuous improvement, symbolized by the closed loop in the diagram shown in the exhibit. An effective performance-measurement process must learn from its failures and successes. It must shift measures and targets over time to accommodate the changing strategic direction and thrust of the business.

Step 1: Identify Global Supply Chain Performance Measures and Target

The first step is to identify the set of measures that should be reported. This involves determining how each measure is to be defined and constructed, the source of data for each measure, and the target objective for each measure. It also means determining which of the measures will be aggregated at each level in the organization and how that aggregation will be constructed.

• Which Measures?

In determining which measures to track and report, it is important to realize that no single set of performance measures is right for every company. Indeed, the performance measures selected must be tailored to the corporate and supply chain strategies of the business. For example, a "perfect order" measure may be appropriate for manufacturers selling into many different channels of distribution with demanding service requirements. But is it an appropriate measure in a market served by a single, exclusive distributor? Possibly not. Clearly, the performance measures must be aligned to the marketing, sales, and operating strategies.

We advise clients to select measures that are relatively easy to construct, customer focused, actionable, and simple to understand and interpret. The accompanying sidebar lists some representative performance measures our clients have used in their scorecards. There are many others that might also be considered.

• An Approach to Measure Selection

A Delphi approach can be useful in determining the appropriate set of measures. This technique has several important advantages. For one, it taps into the collective experience and wisdom of an array of supply chain constituents. In addition, it helps achieve the cross-functional and supply chain-spanning balance essential to effective performance-measurement systems. Finally, the Delphi approach achieves broad support for the final set of measures ultimately selected.

The Delphi approach involves polling a broad cross section of individuals in the organization—including representatives from logistics, manufacturing, purchasing, marketing, sales, and general management—to solicit suggested measures for inclusion in the final set. Each Delphi participant is asked to rank the measures in order of importance. Weighted average rankings then are calculated for each measure. The candidate list is pared down by keeping those with the highest weighted rankings. The surviving measures are redefined and resubmitted to the Delphi participants for further evaluation and ranking. The final set of measures and their definitions can be chosen by a steering committee in charge of the Delphi process. Exhibit 2 illustrates the Delphi approach in action.

Recently, we used this approach with a client in the consumer-durables industry. Fifty managers and senior managers were asked to identify the critical measures needed to effectively manage the company's supply chain activities. They initially identified nearly 120 different measures, which were included on the original candidate list. After just two rounds of rankings and evaluation, the list was pared to 15 measures that formed the final set. Though all 15 of the measures are reported at the market/line of business level, only eight are reported at the geographic region/line of business level. Five of those are reported at the company level.

• Establish Targets

With the set of supply chain performance measures in hand, the next task is to determine appropriate goals for each of the measures. This is not a scientific process, but many types of analyses can be usefully applied here. Benchmarking of competitors and non-competitors alike can be invaluable in this process. We have traditionally combined benchmarking with client-specific supply chain analyses—SKU-level inventory analysis, for example, or supply chain network modeling—to establish appropriate targets for whatever measures are identified.

• Determine Reporting Levels

In a diversified, global company, determining the levels in the organization at which the performance measures will be aggregated and how the aggregation will be performed is no small task. Some managers want to see the performance measures reported globally by product line; others prefer reports across product lines for a specific country market or set of markets. A well-designed performance-measurement system must have the flexibility to allow managers to access and analyze performance across many different dimensions of the business. The rules for aggregation of the measures must be clearly specified and agreed upon.

Once the measures are selected they must be clearly documented. This entails a statement of purpose of the measure, how it is to be calculated and aggregated across different dimensions of the business, the collection frequency, and so forth. Perhaps most importantly, a "champion" needs to be assigned to each measure. That individual or team leader will take responsibility for monitoring performance and initiating the corrective actions needed to meet targets and goals.

The template example shown in Exhibit 3 can serve as a repository of this information. Such a document can play an important role in communicating the agreed-upon measures and their roles in the firm's business processes and management.

Step 2: Design the Reporting Tool

Once the supply chain performance measures are identified and defined, and targets established, the next step is to design and implement the reporting tool. This "scorecard" will be used to depict the measures and allow easy aggregation for reporting at higher levels in the organization.

A graphic-based performance scorecard is usually most effective for this purpose. As shown in Exhibit 4, the scorecard has two parts: an executive summary page providing a single view across all measures and a performance-detail section with additional explanatory material.

For the executive summary page, each performance measures should be clearly laid out in a manner such as that illustrated in Exhibit 5. There are three features we like to build into each performance-measure report:

• Trend line. Each measure should portray an agreed-upon set of historical information used for tracking purposes.
• Target. The agreed-to objective is graphed against historical performance and also shows future objectives.
• Commentary. Whenever the measure is reported, the measure champion provides a brief explanation of how or why performance lags or exceeds the target.

The detail pages incorporate all of this information as well as additional data helpful in understanding the reasons behind the indicated performance. For example, the detail page for a customer-service measure on "perfect orders" might also list the top five SKUs that were out of stock and contributed most significantly to shipping orders incomplete.

There are many different ways to portray such reports. Whatever format is used, though, it should be easy to read and understand. And it should provide at a glance a clear picture of performance against each target.

Often the question arises as to how information technology should support this process. There is no single answer to this question. We have implemented performance scorecards in any number of information-technology platforms. Formalized spreadsheet templates that are completed in each market and summarized at the corporate level can be used to quickly launch and support this process in a start-up mode. The next logical step would be integrating the base data and the reporting formats within an executive information system utilizing, for example, a data warehouse interfaced with existing or planned enterprise-wide transaction systems.

Step 3: Embed the Performance Scorecard in Supply Chain Process

Performance measures become most valuable when they are firmly woven into the fabric of the business processes and management of the organization. More than a mere report card, they can and should be visible and used by front-line and senior management to take corrective actions—for example, creating SKU programs or establishing special promotions to drive near-obsolete product out of inventory.

At a minimum, the scorecards should be used in the monthly sales and operations planning meetings of the business—that is, those meetings where market forecasts and manufacturing and sourcing plans are finalized. The meetings should focus not only on creating reasonable forecasts and determining how they will be supported by operations, but also on identifying the actions needed to prevent obsolete and excess inventory buildup in product already available for distribution.

Several organizations we have worked with also use the scorecard in each of their operating committee meetings at the market, regional, and corporate level. This practice ensures that senior managers have a consistent view of supply chain performance and, when warranted, can themselves initiate actions such as reviewing supply strategies for key product lines.

Step 4: Embed the Performance Scorecard in the Organization

Having access to timely performance data is invaluable in its own right. And when tied to the incentive and rewards system of the business, it becomes a particularly powerful force in shaping the behavior of people in the organization. Though most individuals are motivated to "do the right thing" by nature, competing priorities for time and resources often prevent managers from focusing attention on critical issues such as supply chain management unless their individual compensation is connected to the established targets.

The nature of managing supply chains globally requires that meeting targets be a team sport; the compensation and reward systems must acknowledge this. There are many ways to link compensation and performance. These include, for example, awarding team bonuses once goals are achieved; building performance targets into management objectives and reviewing progress in regular counseling sessions; and setting aside a portion of the bonus pool to be awarded to top-performing supply chain teams and champions.

A recent client setting underscored the need to connect these scorecards to reward programs. We identified a small number of well-defined and balanced measures for this organization's global supply chain business. The management team quickly adopted the tool and rolled it out to every market worldwide. The first few months of reports revealed some startling information. For one thing, the company discovered that 40 percent of its SKUs in some markets accounted for 50 percent of the inventory, but less than 2 percent of the sales—and almost no profit!

The scorecards had successfully raised awareness of the problems affecting supply chain performance. However, a few months later the scorecards showed little if any improvement. Simply put, there was not enough focus placed on solving the problems that were evident. After some hot debate, it was agreed that a portion of the bonus pool for country managing directors the following year would be set aside for those who made the most significant performance improvements against the scorecard measures. Within three months the organization started to see dramatic improvements: customer-service levels doubled in some cases, while inventory turnover increased 50 to 70 percent. By linking reward programs to the performance measures, the organization was able to convert the potential to reality.

Step 5: Continuous Improvement

Once the supply chain performance measures are implemented, they must be continuously monitored and evaluated for their effectiveness in achieving the desired behaviors and performance critical to overall business performance. As business strategies and processes change, modifications to the performance- measure scorecards also must be made.

The following example from one of our clients illustrates the point. After a performance-measure scorecard had been in place for some time, an initiative was undertaken to move supply planning for local country markets from control of the country general managers to a regional (multi-country) planning group. As a result, inventory turnover targets that had historically been one of the measures of a country market's performance were redefined and moved to the regional planning organization's scorecard. This was the obvious change required to realign performance measures with the appropriate responsibility and accountability point in the process.

The less obvious change required in the measures was discovered only after the reorganization had been in place for several months. Suddenly, inventory was escalating. Why? The country markets, now unencumbered with the cost of inventory, began to bias forecasts higher and higher. This would ensure that they always had whatever product they needed in their local distribution center...if the sales materialized. The second change to the performance-measure scorecard was to make forecast accuracy an even more important priority for the local country markets. Once they were held accountable for accurate projections of demand, the optimal balancing of inventory investment at the regional planning level was achieved. Inventory investment was reduced by over 30 percent from where it was prior to the planning reorganization.

On a regular basis, and certainly no less than annually, the targets for each measure should be reexamined and reset if necessary. As business strategies change or as goals are achieved, new measures may be added and others dropped. In some cases, the measure may remain—but restated on a different basis to foster the appropriate mindset to achieve ever-higher performance levels.

One company, for example, that had initially decided to include a "months forward coverage" measure in its set (defined as the number of months of inventory on hand to cover the sales forecast) soon realized that it could achieve greater improvement if that measure was instead stated on a "days forward coverage" basis. Once the company had reduced six months forward coverage to 2 months, setting a further goal of reducing inventory from 2 to 1.6 months forward coverage seemed more compelling, particularly when stated in terms of days (45-days forward coverage to 36-days forward coverage).

Supply chain performance measures drive behavior, and behavior drives overall business performance. Especially when managing supply chains, an effective performance-measurement process that connects activities across the globe can spell the difference between failure and success. A balanced scorecard that monitors and tracks key indices of service, cost, and revenue lift—and the important supply chain drivers behind them—is an invaluable management tool. It can accelerate supply chain integration as a strategy and the benefits and rewards that come with that strategy.

Measures alone, however, will not work unless they are firmly embedded in the supply chain processes and organization. Linking targets to the compensation, incentive, and reward systems of the business is essential for winning over top management's commitment to achieving world-class supply chain performance.